Should I Withdraw Money From My Retirement to Pay Creditors?

Posted on Sep 9, 2011 1:08am PDT

When your facing harassing and abusive creditor calls and you do not have enough income to pay creditors it can get extremely overwhelming and frustrating. You will inevitably look to whatever options will help get the creditors off your back and avoid bankruptcy. One of the worst decisions you can make is to turn to the money in your retirement to pay creditors with. Although this sounds like a tempting option in almost every case it will leave you in a worst financial situation than filing for bankruptcy.

One of the biggest mistakes you can make is to use money that is supposed to help you retire, for paying off debts. Why is this a bad option?

First most people who choose this option end up depleting the allowable withdraw portion of their 401K, IRA, TSP or other retirement before they ever finish paying off their creditors. In the majority of cases you will still be left with mounting debt after your have depleted a good portion of your retirement. In most circumstances ,where you are using your retirement to pay creditors, there is no disposable income available from work to pay creditors. You may choose to use your retirement temporarily in the hopes that your income situation will improve, but be aware that in many cases this may not result.

Depleting your retirement income from a 401K, IRA or Profit-sharing Pension plan, leaves you financially vulnerable in the future. The funds that you have accumulated for future use are been spent on debts, but where does that leave you in the future? Will you be able to provide for your necessities when you retire without this income? In most cases the loss of this income can put you in a financially vulnerable situation when you retire. You are solving a current financial problem, but are you creating a future financial disaster?

The taxes, penalties involved in early withdraw of retirement income can create an additional financial burden that bankruptcy may not be able to solve. Withdrawing money from your 401K or 403(b) and not paying it back will result in a tax liability and early withdraw penalty. If you become indebted to the IRS from early withdraw of income from either a 401K , 403 (b), or IRA, the liability may be difficult to eliminate in bankruptcy. Paying back your 401K or 403(b) loan may also not leave you in a better financial state. If you are already struggling to cover your necessities with your income, having an additional deduction in income will not benefit you. Having to pay back a 401K loan can drain you of income you need to cover your monthly expenses and needs. Many people forgo medical insurance, dental work, medical care, and other necessities in an effort to cut down on their monthly expenses and pay back a 401K loan. Again this leaves you vulnerable to getting into debt again.

Retirement plans are protected in bankruptcy and cannot be touched by creditors. Bankruptcy can allow you to eliminate debts from credit cards, medical bills and personal loans while protecting your retirement plan. Protecting your IRA, 401K, pension or other retirement for the future puts your in a better position to be financially secure.

Although using your retirement to pay back current debts may seem like a good option, in the majority of cases it leaves you in a worse position. All to often clients only decide to file for bankruptcy after they have depleted their savings and retirement investments. When planned properly, bankruptcy will not only resolve your current financial situation but can ensure a healthier financial future.

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